Gross return

Gross return is the return the portfolio itself generated, before anyone takes a cut. No management fee, no performance fee, no brokerage, no exit load — just the growth in value.

The workbook defines it as the total return generated on investment before the deduction of any fees, expenses or commissions, stated for a specified period. Its counterpart is net return, which is calculated after adjusting gross return for fees, expenses or commissions.

The warning comes in the same breath: net return is the return the investor actually makes, so focusing on gross return can be misleading — though gross return can still be used to evaluate the performance of investments at a broader level.

Formula (Chapter 10, section 10.1.4).

Gross return = (Gross value of the portfolio − Capital contribution) ÷ Capital contribution

Net return = (Net value of the portfolio − Capital contribution) ÷ Capital contribution

What sits between them in a PMS. Chapter 8 lists what may be charged, as agreed with the client:

• Investment management and advisory fee — fixed, return-based, or both
• Custodian/depository, registrar and transfer agent fees
• Brokerage and transaction costs at actuals (STT, stamp duty etc.)
• Certification, fund accounting and professional fees; out-of-pocket expenses
• Exit load — maximum 3% / 2% / 1% of the amount redeemed in years 1 / 2 / 3, nil after

and what may not: upfront fees. Operating expenses excluding brokerage are capped at 0.50% p.a. of average daily AUM.

Where gross return is legitimately useful. Comparing the underlying investment performance of strategies at a broad level, before fee structures that differ between clients.

Where it is not. Telling a client what they earned. Chapter 10 then goes one step further — even net return is pre-tax; the investor or adviser calculates the post-tax figure.

Gross return = (Gross value − Capital contribution) ÷ Capital contribution

The workbook's worked example (Chapter 10, section 10.1.4): ₹1,00,00,000 invested for one year, 20% profit, hurdle 10%, other expenses 0.50% of gross value, fixed fee 1.5% of the average of capital and gross value, performance fee 20% of profits over the hurdle, upfront and set-up fees nil, exit load 2%.

Total charges = 60,000 + 1,65,000 + 1,55,000 + 2,32,400 = ₹6,12,400.

• Gross return = (1,20,00,000 − 1,00,00,000) ÷ 1,00,00,000 = 20%
• Net return = (1,13,87,600 − 1,00,00,000) ÷ 1,00,00,000 = 13.88%

The gap of 6.12 percentage points is exactly ₹6,12,400 on ₹1 crore. A distributor who quotes 20% to this client overstates their experience by nearly a third.

Gross versus net return is section 10.1.4 of Chapter 10 (Performance Measurement and Evaluation of Portfolio Managers, 10% weightage), with a full rupee illustration that is a natural source of calculation questions. It draws on the fee rules in Chapter 8 (Operational Aspects of Portfolio Managers) — upfront fee nil, hurdle rate, high water mark, exit load — and leads into post-tax return in section 10.1.5.

• Gross return is before all fees, expenses and commissions; net return is after.
• Net return is what the investor actually makes — the workbook calls focusing on gross return misleading.
• Order of deductions in the illustration: other expenses, fixed fee, performance fee (over the hurdle), then exit load.
• The fixed fee is on the average of capital and gross value in the illustration, not on closing value.
• The performance fee is 20% of the excess over the hurdle value, not 20% of all profits.
• Neither gross nor net return is post-tax.